Thursday, November 29, 2007

I have another fund at Vanguard that has recently qualified for conversion from Investor shares to Admiral. The Admiral shares are a lower-cost version of the same fund that is limited to investors with $100,000 or more in an account that has been held at VG for a minimum of 3 years. It’s a wonderful thing and once again the spoils are given to the clients with the most money. It goes to reason that clients with 100k or more are less likely to jump in and out of a fund, so its easier for VG to manage. Its easier meaning its less costly because the fund does not have to sell shares to meet the demands of traders. Managing an index fund is most efficient with a steady money pool.

Key points of the conversion1. The conversion is free, there are no tax implications2. The ticker symbol changes3. Expenses drop by 33%!!!! VG is well known for its low cost, low fee index funds. The average expense for a fund in the same category is over 10 times that of VG!

What about ETFs, aren’t their expenses even lower?Yes, they can be. I found a comparable ETF with an expense ratio of 0.12, that’s 0.02 cheaper than the VG Admiral fund. They also do not have the 100k minimum requirement. The downside is that ETFs require a commission to buy and sell and the commission makes dollar cost averaging very inefficient. If you don’t have the 100k, buying an ETF through Zecco (free trades) is an attractive option. However, with such a large sum I am definitely more comfortable investing through a proven and trusted institution such as VG.

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